How FM struck a fiscal chord: Story of Budget in nine charts

One could argue that may not have been necessary as the extension of the free food grain scheme and the hike in gas subsidy just a few months ago had already done the job without disturbing the fiscal maths, thanks to robust tax collections. Moreover, Sitharaman surprised fiscal watchers by undershooting the budgeted fiscal deficit aim for 2023-24 despite slower nominal GDP growth. And for 2024-25, she has gone for an ambitious consolidation path. Mint explains the numbers.

Also read: The math of how the Centre plans to cut fiscal deficit, explained

 

All for discipline

Just two months ahead of the national elections, the Narendra Modi government defied the temptation to use the Budget to announce any new measure that could be deemed populist. Instead, it showed the intent for better fiscal discipline than was expected, with an eye on a medium-term consolidation path. That’s come at the cost of just a tepid increase in capital spending and a compression in revenue spending.

The government’s aim for a fiscal deficit of 5.1% of GDP in 2024-25 is around 70 basis points lower than the updated estimate for the current year. This puts the goal to reach the 4.5% mark by 2025-26 within striking reach. The reduction relies on a check on expenditure: the total budget size is down from 15.1% of GDP to 14.5%, while receipts are likely to get a meagre bump from 9.3% of GDP to 9.4%.

The capital spending component, which had seen a massive boost in the previous years, is set to increase only by 20 basis points (but the new share, 3.4%, will be the highest in two decades). In 2023-24, too, the capital spending budget was 3.4% of GDP, but revised estimates show that this will be curtailed marginally to 3.2%.

While the capex budget is still rising, the capex by public sector enterprises (which they raise themselves outside the Centre’s books, but is still an indicator of their role in national growth) will continue to slip to just 1% of GDP from the pre-pandemic levels of 3.2-3.5%.

Revenue expenditure will rise only 3.2% year-on-year, with no increase in outlay for the rural jobs scheme and underwhelming hikes for the agriculture and rural sectors. But don’t go by the allocation: in recent years, the Centre has adopted the policy of boosting welfare funds later in the year if revenue streams exceed expectations.

That’s the case in the ongoing year, too. Robust tax collections have given the government room to extend the free foodgrain programme, hike LPG subsidy, and increase the allocation for the rural jobs scheme, all of which could impress voters, without compromising on fiscal aim.

Goalposts fuzzy

On the revenue side, gross tax collections are expected to increase 12.5% in the ongoing year, the revised estimates show, notwithstanding the striking 14.4% year-on-year increase in the first nine months of the fiscal year. This underscores the recent trend of the Centre underestimating its tax collections initially and later scoring big. Even for 2024-25, the Centre has budgeted an 11.5% year-on-year growth in its tax mop-up, lower than 2023-24 growth, even though nominal GDP growth is expected to increase.

 

That said, despite the ambitious goals on the fiscal deficit front, the Centre’s debt is likely to stay unchanged in 2024-25, pressing the need for further consolidation. If the government overshoots its tax collections target in 2024-25, and if that leads to lower borrowing, that may aid the fiscal consolidation path further.

While on one hand, tax collections have likely been underestimated, the Centre’s target for disinvestment receipts once again seem overly ambitious, given its recent dismal track record. It is set to miss its initial budget for disinvestment receipts for the fifth year in a row. For two years, not only has the government been missing its initial estimates, but also the revised estimates, which it gives just two months before the year ends. This year too, the budget has revised the disinvestment receipts to ₹30,000 crore from ₹51,000 crore for 2023-24, but the latest available data shows the receipts have been only about ₹12,500 crore so far. That leaves a long way to reach even the revised estimate with just two months to go. The paltry progress raises questions whether the target of ₹50,000 crore for 2024-25 can be achieved.

Welfare quotient

In her speech, Sitharaman reiterated the government's four focus areas: women, youth, poor and farmers. While the interim budget scored a win for women, the youth and farmers could be left wanting for more.

The government’s outlay towards gas subsidy—aimed at benefiting rural women—remains elevated ahead of polls with an allocation of ₹11,925 crore for 2024-25, nearly double the allocation two years ago. While year-on-year, the allocation marks a drop of 2.6% on-year, a slew of announcements made by the government in this fiscal year to support cooking gas subsidy have kept the flame on this key provision burning. Last year saw two back-to-back hikes in cooking gas subsidy for beneficiaries under the government’s flagship Pradhan Mantri Ujjwala Yojana, allowing them to purchase cylinders at lower prices. The move came on the back of retail inflation remaining above the central bank’s target of 4% for much of last year.

Meanwhile, the outlay on the crucial Mahatma Gandhi National Rural Employment Guarantee Scheme remains unchanged at ₹86,000 crore, compared to the revised estimates for 2023-24. This is despite the fact that demand for jobs under the scheme remains elevated. The government has also consistently overspent on the scheme beyond initial allocations, shows budget data—in the last fiscal, its actual spending was 43% higher than what it had budgeted, and in 2022-23, it was 25% higher.

On the welfare front, the interim budget paints a mixed picture. The budget has positive news for women, health and education sectors, with outlay to these sectors seeing a rise. Especially for women, who are seen as a key vote base for the current government. The gender budget saw a near-20% rise in its outlay to ₹3.1 trillion from ₹2.6 trillion in the revised estimates of last fiscal. However, agriculture and related sectors lost focus with outlay rising by a mere 4.5% to nearly ₹1.5 trillion.

In theory, the interim budget’s full-year estimates need to be taken with a pinch of salt, since it’s only a vote-on-account for a few weeks until elections are held. But in reality, a Mint analysis of the last four interim budgets showed that the main budget that is released after poll results doesn’t veer away much from the February projections. Less so when the incumbent government retains power. Expect little change in July if that happens.

(Story by Pragya Srivastava and Nandita Venkatesan; Data and charts by Manjul Paul, Payal Bhattacharya, and Shuja Asrar)